We spend much of our working lives looking towards retirement as a goal. But actually, retirement is not the destination, it’s only part of the journey – and the harder part can be managing our finances after we’ve stopped working. Using the analogy of mountaineering, think of working life as reaching the summit, your day of retirement is at the top, and thereafter, you are coming back down the mountain. Reaching the summit of a mountain is an incredible achievement, but it’s a halfway point. American mountaineer Ed Viesturs, who has climbed Mount Everest seven times, puts it rather succinctly: “Getting to the summit is optional; getting down is mandatory.” The summit is also the point of maximum risk. Thankfully, most climbers avoid the dangers, in no small part thanks to the Sherpas they hire to help carry gear, install ropes, and break tracks. Retirement planning is akin to mountaineering in many ways. Accumulating your savings is the ascent and spending them is the descent. Financial planners are like mountain guides – financial Sherpas if you like, applying robust and empirical evidence to retirement income planning. We believe that everyone benefits from having a retirement Sherpa (a financial planner). To take the analogy a little further, the better qualified and experienced the Sherpa, the safer you will be at the summit – where the danger is greatest. So why is the summit so dangerous? During your working life, you’ve been building your pension pot. You have money coming in and you can always add to the pot, or work for longer, or decide to take a little more risk. At the summit you need a different approach. Avenues for increasing your pension pot are limited. So you need to adopt strategies that allow you to spend money but not to run out along the way. Your spending plan and investment returns in the early years of retirement have the greatest impact on your retirement journey as you head back down the mountain. Equally, you need to learn not to be afraid to spend money. You need to have the confidence that you won’t run out of money before you run out of life. In the first two or three years after retirement especially, people can often feel anxious about spending any money. Navigating back down that mountain is all about balancing what you have and what you want to spend, until you reach the destination. And the end of your life is, in fact, the destination. There are five risks associated with retirement planning, which neatly sum up the difference between the saving and spending stages: Diminished earnings flexibility – once you have retired, even if you wish to return to work again your options may be limited. Inflation risk – did you know yearly income of £1,000 in 1990 had the buying power of £476 by the end of 2020? This is a reduction of over 50% over a 30-year period using the Consumer Price Index (CPI). Decreasing cognitive abilities – the abilities of people decline as they age, and this includes their ability to make financial decisions (even if they don’t recognise this decline). Unknown time horizon – nobody wants to know when they die, but if we did it would make planning so much easier! The longer the post retirement timeline, the longer the savings pot has to last. Heightened sequence risk – more about this below… What is Sequence Risk Sequence Risk isn’t the same as volatility, but it does have an impact on your retirement success. Investment returns in the early period of your retirement have a disproportionate effect on the overall outcome, regardless of long-term returns over your entire retirement period. And it must be properly managed to avoid disaster. In short, if you get good returns during the early part of your retirement then you’re unlikely to run out of money (assuming in the lead up to retirement you have saved adequately). However, if those returns in your first few years are poor, then you may have an issue. Withdraw too much when the market is down and you run the risk of running out of money – or at least having to reduce your withdrawals to make sure your retirement fund doesn’t run dry. Do you know someone we could work with? If you have a retirement plan in place and you’ve chosen us to be your helpful Sherpa’s whilst you’re on the retirement mountain, then that’s great. But there may be people you know that may need some help in putting a retirement plan in place, and we thought this helpful analogy could be a good starting point for them to understand how we can help. So please pass this story on to anyone who you think might benefit from our help and hopefully we can navigate them safely up and down the mountain too. Keep an eye out for next month’s newsletter and we will look at the strategies that help to achieve this whilst also answering the million-dollar question: how much will I be able to spend in my retirement, without running out of money? If you have any queries, please do not hesitate to contact the Proposito team on 01285 708444 or e-mail us at firstname.lastname@example.org.